FACTBOX-Key political risks to watch in India

March 06, 2013|Reuters

By Frank Jack Daniel

NEW DELHI, March 7 (Reuters) - India's slowest economicgrowth in a decade could be even worse than anticipated, aspreliminary data released in February showed the economy appearsto have grown 5.0 percent in the fiscal year that ends thismonth - lower than both the central bank and Finance Minister'sforecasts - underscoring the urgent need for reforms to boostgrowth.

RATINGS (Unchanged unless stated):

S&P: BBB-

MOODY'S: Baa3

FITCH: BBB-

Following is a summary of key political risks in India:

ELECTIONS AND ECONOMY

In his budget at the end of February, Finance Minister P.Chidambaram defied market expectations of spending cuts bypromising a bigger outlay for the coming fiscal year, whichfalls just before an election.

The budget was an illustration of how he and Prime MinisterManmohan Singh are being pulled in different directions: byforeign investors who want fiscal discipline and reform, and byvoters at home who would react badly to anything resemblingausterity measures.

Total budget expenditure will hit 16.65 trillion rupees($309 billion) in the new fiscal year that begins on April 1,Chidambaram said, in comparison with spending in the 2012/13fiscal year that is on track to hit 14.3 trillion rupees. Evenwhile pledging higher spending, he said he had "no choice but torationalise expenditure".

Ratings agencies Standard & Poor's and Fitch have threateneda downgrade if the fiscal deficit is not tamed.

Chidambaram, who has staked his reputation on hitting afiscal deficit target of 5.3 percent of GDP this year, has triedwith some success to please investors, introducing reforms suchas allowing foreign supermarkets to enter India, but the budgetwas aimed squarely at Indian voters, many of whom are turningaway from the ruling Congress party.

Long periods of gridlock in parliament, failure to passpromised reforms, and a series of corruption scandals havecharacterised Singh's second and final term in office, and theparty is nervous about its prospects in polls due by May 2014.

In a high-profile speech in January, Rahul Gandhi appearedto embrace his role as a leading contender to be the country'snext prime minister, though he gave few clues about his views onpolitics and the economy.

Gandhi, whose mother Sonia is president of the Congressparty, will be the party's main hope for elections in theworld's largest democracy.

- Official announcements of candidacy, or suggestions fromleading politicians they may stand in 2014. Chidambaram has beenmentioned as an alternative to Rahul, potentially in apower-sharing arrangement between Sonia Gandhi and ManmohanSingh, especially if Congress can only form a weak government.

DEFENCE, WEAPONS IMPORTS

The worst fighting between India and Pakistan in thedisputed Kashmir region for almost a decade struck in earlyJanuary when two soldiers from each side were killed, and theIndian army chief accused Pakistani soldiers of beheading one ofthe victims.

Any violence between the nuclear-armed neighbours alwayssparks concern, particularly in a region which has been thecasus belli for two wars since 1947, and the January flare-upcame after tensions at the Kashmir frontier, known as the Lineof Control, had been rising for months.

Though those killings have not led to larger battles, moreoutbursts of violence are not impossible, and it takes politicalskill to defuse incidents.

India, the world's largest weapons importer, earlier thisyear suspended a deal for $750 million worth of helicopters ithad ordered from Finmeccanica SpA pending an inquiryinto allegations the manufacturer paid bribes to clinch thecontract.

If the deal is cancelled on the basis that illegal paymentswere made through a middleman, it could jeopardise othercontracts. The biggest deal on the table is for 126 fighterjets, expected to cost upwards of $10 billion.

India is currently in exclusive talks with France's Dassaultfor those jets. The defence ministry says it is too early to sayif there are any problems with that deal, and expects tofinalise negotiations this year. If the deal were for any reasonscrapped, a new tender would likely have to be issued.

Number two contender, the Eurofighter consortium, couldpossibly enter exclusive talks with India if Dassault fails toreach a price agreement with the government.

What to watch:

- Any further violence in Kashmir, and how the Indian andPakistani governments respond.

- Outcome of the investigation into the Finmeccanicahelicopter deal, and whether other arms contracts are reviewed.